China’s National Bureau of Statistics (NBS) will release Q1 2025 GDP data tonight US Eastern time, Tuesday morning local time with press conference to follow at 10:00 am. The release is expected by markets to register a solid 5.2% annualized growth rate, from 5.4% in Q4 2024 and 5.3% in Q1 2024.

As is customary, last Thursday, April 10, nine economic departments provided their own estimates for GDP to China’s State Council. These ranged from 5.0% to 5.4% and were clustered around 5.2% and 5.3%.

While these estimates are not typically perfect indicators for the actual data release, the NDRC, China’s economic planning agency, edged toward the higher side, at 5.3%, and we find it plausible that among other things the front loading of exports ahead of US tariffs may have helped boost the numbers to the higher side of the range.

The week begins with Federal Reserve Governor Chris Waller. Waller’s message of late has leaned dovish, focusing on his expectations for continued disinflation and eventually rate cuts. The March inflation data reinforces this view as it matches his suspicion that residual seasonality accounts for high inflation in January and February. Moreover, Waller has emphasized that tariffs are not inflationary though, importantly, he already conceded that the impact depends on size and implementation.

The Fed is locked in place. Fed speakers have stepped up the message that the focus now is on maintaining stable inflation expectations, and the underlying message is that effort could require rate hikes. At a minimum, the Fed doesn’t expect to change policy until the second half. Market participants, however, are not hearing that message yet; we think Powell will try to drive the point home this week. Volatile markets have not stopped the Fed from delivering that message. It’s looking like the Trump administration has ignited what amounts to an existential battle for a Fed that very well knows the mistakes of the 1970s.

Regarding US treasuries, according to a well-placed source in China, in repeating warnings (or less graciously, threats) that both the US stock and bond markets could face additional turbulence if the trade war with China were to continue to escalate,Beijing has already started to “dump a small part” of its US bond holdings.

Over the years, we have heard many threats at times of heightened tension from Beijing over selling their US bond holdings, only to be tempered by reality (blowback, market size, currency effects, etc.), even as the very gradual, long-term objective and process of rebalancing away from the US remains intact.

In reading the current situation, however, we would give this comment a bit more credence, most notably for how it is phrased, “a small part,” which can be read not as the usual chest thumping threats from hawkish quarters, but more as an “attention grabber” for Washington.

According to Beijing, the head of China’s trade and economic team (at the director-general level) has already received a call from his counterpart on the US side to hold ministerial-level talks with the US. But Beijing has rejected talks for now, repeating China’s three-point position to the American counterpart.

Xi will pay a state visit to Vietnam, Malaysia, and Cambodia starting next Monday (April 14) with an intent to sign a series of economic, trade and investment cooperation agreements with the three countries.

With the focus rapidly shifting to tax cuts, this 10% baseline will now provide Treasury and Congress some certainty around a floor for potential tariff revenue raise with which to push negotiations along between the Senate and House Republicans. As opposed to most media and Washington analysts, we expect these to proceed quickly.

Quick Follow Up
Bottom Line: This does not mean that we, or even Powell, think the next move will be a rate hike, and as we said last night, we wouldn’t advise anyone try to catch this falling knife. One of Powell’s goals at this juncture is to tamp down inflation expectations and provide the Fed more room to cut if (or when) the labor market turns. But we also think the takeaway is that the bar for cuts is higher than believed, which means conditions on the ground need to get decidedly uncomfortable to force a rate cut if inflation climbs as anticipated as tariffs pass through the economy.

Monday Morning Notes, 4/7/25
Powell can’t save financial markets alone here. Fiscal policy, especially ill-conceived fiscal policy, is a powerful force, a lesson learned in the wake of the pandemic. It will take a lot more than a 25bp or 50bp rate cut to fundamentally change the tide.

Financial markets need a substantial rehaul of President Donald Trump’s tariff strategy. The ball is rolling downhill now; haphazard, occasional tariff negotiations with small nations won’t be enough to stop it, nor can foreign governments trust the US to maintain any negotiated deal unless Congress takes back control of tariffs.

Over the weekend, however, the Trump administration dug in on its agenda. Still, it’s worth noting that in previous iterations of this cycle, Trump has often escalated and then backed down, except for tariffs on China.

We have not changed our Fed call in the wake of the latest tariff announcements. Given what we have on the table now in data and theory, we anticipate the Fed will hold its ground until the job market shows signs of strain and then to proceed by cautiously balancing between the two mandates. In theory, this is just more risk to both sides of the mandate. That speaks to the framework we have laid out, and against a May or June cut.

To be sure, we retain a healthy degree of caution. We can’t dig in too deeply here. It’s a long time to June, in theory this is a “sudden stop” type of shock, the Fed may need to manage a disorderly fall in risk assets, there exists the possibility of political pressure on the Fed, and the Fed may misread the nature of this shock as more transitory than it really is.

The path ahead for the Fed and markets depends on whether the Fed views Trump’s trade policies as a transitory shock, and whether that is the correct assessment.

This suggests that Powell will deliver a “hold steady” message in tomorrow’s speech. He can fall back on the story that the data is sufficiently strong that the Fed can remain on hold as it assesses the impact of tariffs in the context of the totality of fiscal policy.

That said, we expect Powell will backtrack on his dovish press conference inflation messaging. That messaging seemed ill-advised, and it didn’t reflect a consensus of FOMC participants. Repeating it will appear tone-deaf when inflation forecasts are now heading above 4%, deepen expectations of easier policy, and would signal that the Fed doesn’t take the price mandate seriously.

We advise market participants to watch for any sign from Powell regarding the Fed willingness to endure pain on the employment side of the mandate.

The Reserve Bank of Australia (RBA) will hold off on a March rate cut but likely tilt guidance toward a May easing using language as it starts to rebalance the Bank’s inflation concern with downside growth risk.

As is the case for a number of central banks, inflation and growth risks are now pulling in different directions, posing the likelihood the RBA will need to shift more clearly to protecting downside growth risks over the next several months.

We see the Bank cutting 25 bps in May and August 12 to around 3.50%, with the risk of another move in the second half of the year (see SGH 12/2/25; “RBA: Hawkish Cut, Shallow Path”). While that may be sufficient to buffer economic growth, the Bank will become increasingly attuned to the risk of a softer second half of the year amid ongoing trade fallout.

Monday Morning Notes, 3/31/25

We have been on the road this past week, and here is what we have been discussing with clients:

· Tariffs, tariffs, tariffs. Trump’s tariffs policies are the single biggest shock hitting the US economy, and it’s a shock in two dimensions, magnitude and uncertainty. So far, the turmoil on Wall Street has not deterred Trump, and the Washington Post reported over the weekend that he is pushing his staff to be even more aggressive:

But Trump continues to muse to advisers that his administration should continue to escalate the trade measures and has in recent days revived the idea of a universal tariff that would apply to most imports, regardless of their country of origin, the people said, speaking on the condition of anonymity to describe private discussions.

In public and private, the president has said tariffs represent a win-win that will bring manufacturing jobs back to the United States and fill federal coffers with trillions of dollars in new revenue. He has also said he thinks he made a mistake in allowing advisers to talk him out of bigger tariffs during his first term, the people said, and that he thinks a single, simple duty on most imports could help prevent exemptions from weakening their impact. It’s unclear how seriously that proposal is being considered.

Trump’s drive to reorder the global economy through tariffs will not end anytime soon, presumably until the economic implications become too big to ignore politically. Prepare accordingly.

Despite all the uncertainty and the pullback in market pricing for cuts, we continue to lean toward another 25bps rate cut on April 17, from 2.5% to 2.25%, followed by a final cut to 2% on June 5.

If we were to have to choose between an April or June cut, we would lean to April as the cleaner and more logical choice, allowing the ECB to reassess at its next forecast round in June.

The Bank of Japan (BOJ) is almost certain to hold its policy rate steady at 0.5% this week though, as we have been writing, the case to raise rates on May 1 has been steadily building in the background.

Rising inflation, the latest bid by unions for wage increases and importantly, a higher yen, all have been supporting BOJ governor Kazuo Ueda’s bid to secure a “virtuous cycle” of wages and prices, so he can push the policy rate higher.

However Ueda’s caution to avoid rattling markets or signal that the Bank is stepping up the pace of its hikes is likely to limit his post March 18-19 meeting press conference comments to hints at the Bank’s readiness to hike again at a future meeting.

The SEP

We anticipate the SEP will reflect the standard theoretical impact of a supply side shock. The standard impacts are lower growth and higher unemployment and inflation. The Fed has more certainty about the nature of the shock than it did at the December FOMC meeting, and FOMC participants should incorporate that updated knowledge in their forecasts.

We think higher unemployment and inflation will offset each other and allow the median dots to remain the same as in December.

We see at least a 50-50 chance the Fed pauses QT at this meeting. The messaging around QT has been sloppy. On one hand, the Fed has rolled out a bunch of metrics to say that reserves are still abundant. On the other hand, the Fed sees that debt ceiling dynamics may temporarily make reserve less abundant. If the latter is a concern, it doesn’t make much sense to wait until the Fed is closer to a problem before pausing QT which argues for pausing at the beginning of April.

Powell can describe rising unemployment and inflation forecasts as having offsetting impacts on the policy rate projections; it’s simply the dual mandate in action. Higher unemployment is the pain necessary to ensure that inflation returns to trend.

Assuming the SEP follows our expectations, Powell may be asked to explain why the SEP continues to forecast rate cuts even with rising inflation forecasts. This isn’t easily explicable without a higher unemployment forecast. Without a higher unemployment forecast, the Fed needs to lower the expected number of rate cuts, otherwise the Fed’s reaction function will be perceived as more dovish and fuel inflation expectations.

There is no consensus for an imminent rate cut. With the data the Fed has on hand, the labor market is in balance and inflation threatens to be sticky above target. There is little room to consider a rate cut at the May meeting at this juncture; in Fed parlance, there is no hurry to cut rates (the hurry will come if initial claims start to rise). Powell can largely repeat his pre-blackout messaging.

A cut at the European Central Bank’s next meeting in April to follow the 25bps cut in its benchmark deposit ratetoday to 2.5% is clearly a decision that is very much up in the air. But although today’s press conference from ECB President Christine Lagarde was, in being fully noncommittal on future moves, a bit more hawkish than we had expected, we still lean toward expecting two more 25bps rate cuts from the ECB in April and June, to take the deposit rate down to 2%.

Where we would adjust our previous assessment is that an April cut may no longer follow in response simply to data that affirms further confidence in hitting the ECB’s latest inflation forecast. Most notably, that would mean further affirmation of continued gradual disinflation in core and services, which we expect. Rather, the Governing Council may need just a bit more rattling on the trade front, or on signs of continued consumer retrenchment, to get consensus for two more back-to-back cuts. We do think that will be coming.

Bottom Line: This week is shaping up to be a key moment for Federal Reserve Chair Jerome Powell. The Fed takes fiscal policy as given, and Powell needs to decide what that means in this environment. If Powell decides that Trump’s tariff salvos will soon wane, he will lean toward looking through tariffs as temporary and signal a willingness to adjust rates more quickly. We think, however, it is more likely than not that Bessent has disabused him of that notion, and he will follow the unified guidance of FOMC participants which is to push any rate decisions toward the back half of the year.

If You Don’t Have Time This Morning

For the Fed, risks are growing to both sides of the distribution. On one side, Trump-driven uncertainty is beginning to weigh on confidence, raising the risk that firms need to put investment and hiring decisions on hold until they see clarity on tariff policy and the federal budget. That raises the specter of the kind of coordinated pessimism that precedes periods of weaker growth. On the other side, inflation expectations have picked up, something that already keeps FOMC participants up at night as they ponder the impact of tariffs. The Fed doesn’t feel a need to address either side of the distribution for now. The Fed views the labor market as balanced and resilient and while inflation is off its peak, it’s still elevated. The Fed sees no urgency to act and is comfortable moving to the sidelines for the foreseeable future. It likely won’t cut rates in the coming months on inflation alone; rate cuts require that the Fed sees a threat to the employment mandate. That outcome strikes us as more likely than the possibility that the labor market overheats such that the Fed begins reversing last year’s rate cuts.

what will ultimately determine the rate path from March onwards will be the evolution of inflation. And in view of the divisions within the Executive Board, the February and March inflation reports will gain even greater importance.

In part due to base effects, the ECB expects services inflation to finally drop to levels compatible with its 2% target over the coming months. More importantly, there is widespread evidence that wage pressures are coming down dramatically. And on the activity side, there is a chance that the already modest expectations for 2025 growth will need to be revised down in March, yet again.

If You Don’t Have Time This Morning

As we have expected since the beginning of the year, the Fed is positioning for an extended pause. FOMC participants are in no rush to again recalibrate interest rates. With growth solid, the labor market roughly in balance, and inflation still above target, the Fed is content to sit back and adjust policy, if necessary, only after it sees the impact of Trump policies.

The Reserve Bank of Australia (RBA) looks set to serve up its first rate cut in almost five years this month as the balance between considerations of keeping downward pressure on inflation without spiking unemployment, starts to tip toward downside growth risk.

The RBA will likely cut its cash rate 25 basis points to 4.10% at its February 17-18 forecast round meeting, accompanied by a slight reduction in its inflation forecasts if the most recent quarterly inflation data have confirmed its projections that further progress is likely.

The decision will not come without arduous Board debate and agreement to go it slow thereafter. Governor Michele Bullock’s press conference will center on that inflation-vigilant hawkish message.

The RBA will have to navigate its policy moves around this year’s Budget, scheduled to be handed down by the Anthony Albanese government on March 25, as well as yet-to-be-called Federal elections which must be held before May 17.

With speculation swirling among local politicos of potential election dates on April 12, May 3 or May 10, the RBA could skip an April 1 move yet still opt to ease rates again at its May 19-20 meeting.

In short, under “current law” scoring the Joint Committee on Taxation or Congressional Budget Office in its projections assumes tax cuts will expire as legislated and thus show savings after the expiry of certain elements of the 2017 TCJA. Extending the TCJA under that scoring would, in theory, “add” plus or minus $4 trillion of costs over a 10-year projection period.

Under “current policy” scoring, as the description suggests, the calculation is based on current policy, rather than legislation, and so simply extending the current TCJA policies would not add significant costs beyond technical adjustments here and there.

Importantly, there is precedent for using “current policy” scoring, including for example in the last administration when former president Joe Biden rejiggered some children’s assistance programs into new initiatives but at no new additional expense, and which raised no hackles from either side of the aisle.

So, the name of the game for Republicans may be not to offset the entire current law scored “cost” of the TCJA extension plus and real new costs of additional tax cuts, but to find perhaps $2 trillion or so in cost cuts over the standard 10-year projection period.

And so, despite Trump’s statement at Friday’s press conference with Japanese Prime Minister Shigeru Ishiba that he was now leaning more towards targeted “reciprocal” tariffs than a universal tariff, it seems clear to us that substantial revenue will need to be raised via tariffs no matter how these are labeled.

In other words, we do not expect “reciprocal” tariffs to be as modest as might be inferred from effective tariff rate differentials between the US and its major trading partners.

Rather, we expect the Trump administration will also factor heavily for non-tariff barriers, from China’s subsidies of domestic enterprises to the European Union’s heavy use of Value-Added Taxes (VAT) that effectively tax imported and other domestic consumption goods but are not applied to exports.

And finally, regarding the initial 25% tariff lobbed against Mexico and Canada for their lack of action in stemming the flow of fentanyl and migrants across the US border, which was delayed by 30 days after promises to cooperate, many in Washington think that may have been a dry run of the president’s powers under the IEEPA (International Economic Emergency Powers Act) for potential future tariffs as well.

In short, under “current law” scoring the Joint Committee on Taxation or Congressional Budget Office in its projections assumes tax cuts will expire as legislated and thus show savings after the expiry of certain elements of the 2017 TCJA. Extending the TCJA under that scoring would, in theory, “add” plus or minus $4 trillion of costs over a 10-year projection period.